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Investing in B2B Marketplaces: Sarah Tavel (Benchmark)

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Michael Brown

January 19, 2021
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The Bowery Capital team is embarking on a blog series covering B2B Marketplaces. We are doing deep dives on various companies, interviewing founders and investors, and learning what it takes to build success in the B2B Marketplace arena. This week, Sarah Tavel, General Partner at Benchmark Capital, answers some of our questions. You can read all of the posts in our series by going here.

Sarah Tavel is a General Partner at Benchmark Capital where she invests in marketplaces, SaaS, and the future of work. Before joining Benchmark, Sarah was a venture investor at Greylock Partners and Bessemer Venture Partners, and she was also an early hire at Pinterest where she oversaw product. Sarah currently serves as a director at HipCamp, Rekki, and Chainalysis. She joins us today to share some of her insights on marketplace investing.

As an investor in both B2B and B2C marketplaces, what are some of the unique factors that can determine success for a B2B marketplace that may not translate in a B2C setting?

In the hierarchy of marketplace series that I recently published, I wrote about how the key to building an enduring marketplace is to create happiness. One core difference that I have seen with B2B vs. B2C marketplaces is how you create that happiness. For example, in a B2B marketplace like RigUp or Medley, one of the ways to make the supply side happy (the workers) is to pay them faster. That is something that is not used as much in B2C marketplaces but is often employed in B2B settings to drive that happiness factor. Another difference with B2B marketplaces - and one of the questions that we have always had when looking at them - is around the degree of homogeneity in the buyer need, which can influence the relative difficulty of tipping a given marketplace. This is a challenge that B2B marketplaces must contend with, because sometimes implicit in what they are trying to do, particularly for labor marketplaces, is a drive towards commoditization of the supply side. Like in B2C, B2B marketplaces need to think about how they can build an offering that is just so much better than any substitute, that they tip their particular market. It just may be that with B2B marketplaces, part of that relative evaluation might be their software too.

What are the core insights driving your theory on the hierarchy of marketplaces?

The first is that when building a marketplaces, you need to start with the goal (to be #1 by a wide margin), and work backwards from there.

A lot of founders can be really focused on pursuing GMV because they think that GMV is what investors care about, so they put all their effort towards growing that figure. But oftentimes, optimizing for the maximization of GMV in the very early stages of a marketplace can lead you in the wrong direction; it can lead you towards rushing into a big new geography or rolling out lots of new categories, and it’s impossible to build an enduring, highly profitable marketplace if you go down that path. Instead, you really need to start with the long-term goal, which is to build a marketplace with dominant market share, and then work backwards from there. If your goal is to have dominant market share, you need to ask yourself, “What do I have to do in order to see that market tip towards us?” To get this tip, you should focus on a really constrained problem and make the buyers and sellers so much happier with your solution than any substitute that you just become the obvious choice. If I were to summarize what the hierarchy of marketplaces is all about, that would be it.

How do you counsel marketplace founders on how to track happiness – particularly at the early stages when they have limited resources?

In the beginning stages, it is challenging to do cohort analysis because you have to wait for them to mature and it is not very operational. What I recommend founders do is ask themselves a question, “What is the experience that I believe will lead to retention for buyers and sellers?” This is often kind of a hunch, so say you are launching a ride sharing company, your hunch could be that if a user opens up their phone, and they can get a car within five minutes and they rate that driver a 4 or a 5, that is an experience that created happiness which will lead to retention.

Then you can start to quantify and track that funnel – the happy path – and you can assess if a given dollar of GMV can be counted as what I will call “Happy GMV.” So, if you can tell that 20% of your riders are having this “happy” experience of a fast pick-up and positive review, you can say you are at a 20% Happy GMV ratio. Once you know what constitutes Happy GMV, you can look at the operational levers you have available in each part of the funnel that can drive more of those experiences. For example, if riders are opening the app and the ETA for a ride is 10 minutes, you know you need more supply. Similarly, if you are getting lots of ratings of 3 or below, you can tell that you need to improve the quality of your supply. As this becomes more operational, you can track the percentage of your GMV that is “happy” and that is ultimately a far better thing to be optimizing for than simply the amount of GMV on your platform.

In the earlier stages, in a B2B marketplace setting, how do you think about balancing relative happiness across the supply and demand halves of the market as there can be competing tensions in some instances?

It is a constant balancing problem with a marketplace, but in my experience, the demand side is the one that you really have to nail. If you get the demand side, then supply is going to want those sales so they are going to come to you and they will put up with things that maybe aren't optimal because they want access to those transactions. If you instead decide to make the platform really easy for the supply side, and you aggregate all this supply but there isn’t enough value to draw in the demand side, you are not going to go anywhere. It is far more about making sure you onboard that demand side, because if you have demand then supply will come.

When a marketplace is generating meaningful growth and doing a good job of user retention, what are some of the ways you advise founders on increasing transactions per user?

There are a couple of things that apply to both B2B and B2C settings when it comes to driving transaction frequency. The first is you should always be improving liquidity - if you open up a food delivery app, and they don’t have all the restaurants you like, then you are only going to make certain purchases through that platform. As an app improves market penetration, the engagement and usage are going to increase, so I always advise founders to push to continue saturating their market. I also encourage founders to always be pulling on the thread of the buyers’ use case to facilitate more frequent usage. As an example, Uber started with black cars, but that is a splurge, so then they pulled the thread of the buyer need and rolled out Uber X, which brought the price down a lot and facilitated more repeat purchasing. And then they pulled that thread even further, and introduced Uber Pool, which brought customer costs down even further, which enabled even more repeat purchasing. The third lever I think about is just continuously pushing to remove friction from the process. If something is kind of a pain in the butt, you are going to do it less often; the easier you make something, the less negative experiences you create and the effortlessness of the experience will make it easier and easier for people to do it more often.

For the current crop of vertical B2B marketplaces, how do you see those exiting in the long-term (e.g., IPO, private equity buyout, strategic acquirers)?

There is no generic answer, but my expectation is that there will be a lot of public companies that emerge from this period. We were early investors in oDesk, the precursor to Upwork, and today that is a public company. Just like we have a lot of publicly traded staffing agencies, we are going to have a lot of public companies that are labor marketplaces. There is also going to be a lot of M&A activity as these businesses achieve significant market dominance, and I imagine there will also be private equity plays here. Our goal when we invest is to find opportunities that we believe have the potential to become stand-alone public companies.

If you liked “Investing in B2B Marketplaces: Sarah Tavel (Benchmark Capital)” and want to read more content from the Bowery Capital Team, check out other relevant posts from the Bowery Capital Blog. Look out for more content on B2B Marketplaces from us in the coming weeks.